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Putting it across (the aisle)

Came to know from a storyin Business Line that Mr. Chidambaram had published the third volume of his op.-eds. with forewords by Raghuram Rajan and another professor from Chicago. If I were Raghuram Rajan, I would have declined to write the foreword. I would not have liked to reveal my cards. But, well, that is his prerogative. In any case, that is not the purpose of this blog post.

Mr. Chidambaram gets away with quite a bit of finessing because of the impression he creates of deep scholarship and thinking. No doubt, he is a deep thinker and an extremely intelligent man. But, he is also a politician. That means logic and consistency are optional.

Mr. Chidambaram was a reformer in the 1990s. Let us ignore, for the time being, his infamous anti-defamation bill. As a Minister of State for Commerce and then as the Finance Minister in the United Front government, he undertook several well-meaning initiatives. I would still credit his budget of 1997 as one of the most pathbreaking of all budgets although Shri. Yashwant Sinha and Jaswant Singh were more consistent in delivering budgets that served the country well.

Mr. Chidambaram in the new millennium was a different man. He was more of a revenue collector for Ms. Sonia Gandhi and her NAC’s hare-brained schemes. Global and Indian economic booms – after four or five difficult years that set the stage for a nice bounce – helped big time in his revenue collection drive.

Further, in 2004, he imposed the short-term transaction tax and provided exemption to capital gains arising from stock market transactions if stocks were held for more than a year. That is not quite long-term. In any case, capital gains tax exemption for stock market investors is of dubious economic value. [Aarti Krishnan makes a good case for removal of this exemption, here.]

It has been the case that the non-Congress governments do the hard work of cleaning up the mess left behind by the Congress governments (or shall we include Congress supported coalitions) for the Congress to come back and court votes with irresponsible and unsustainable populism. The NDA government (1998-2004) cleaned up the bad debt problem, put the fisc. in order, created infrastructure and handled some structural issues such as privatisation and administered interest rates, etc. It may well be the case this time too!

Good bowlers toil and bad bowlers at the other end, delivering full tosses, get wickets. The Congress was lucky to inherit this platform and they made the most of it – not for the nation, of course. The fiscal parameters improved not because of Mr. Chidamabaram but in spite of his budgets and the government’s irresponsible policies.

The international parallel is how the American government turned in budget surpluses in the stock market boom of the late 1990s because of huge tax receipts from capital gains and other economically unproductive transactions. In other words, you can get lucky. Clinton did get lucky and so did the Congress-led UPA government between 2004 and 2008.

Mr. Chidamabaram announced the farm-loan waiver in December 2007. Not exactly a fiscally or morally or economically responsible decision.

When he came back as Finance Minister in 2012, the fiscal situation had become quite bad. One of the good things that his government did was to institute a monthly adjustment of diesel prices. They carried it out with minimum fuss and efficiency. Full credit to them. But, the rest was window-dressing. When his government was voted out of office, his interim budget had projected a fiscal deficit of 4.1% for 2014-15, having achieved a deficit of 4.9% in 2013-14. But, the truth was that the fiscal deficit in 2013-14 was not 4.9%. But, it was 6.0% or slightly higher.

Hence, it is rather strange to find him question the commitment to fiscal prudence on the part of this government. If anything, this government could be rightly blamed for an overzealous and pro-cyclical fiscal tightening in its first and second budgets.

As for the Reserve Bank of India Board ‘meekly recommending’ demonetisation to the government, the statutes are clear. They leave no choice for the RBI Board. Section 7 of the RBI Act empowers the government to give directions to the central bank from time to time.

But, if we accept his contention that the RBI had been discredited, why not a word or two on RBI redeeming itself with its independent and even unpopular monetary policy decisions in December and in February?

[Postscript: See what the present government has done to discourage treaty shopping. The only pending Double-Taxation Avoidance Agreement to be amended is that of the DTAA with the Netherlands]

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One thought on “Putting it across (the aisle)”

This is not the first time that I have noticed that you are not a fan of LT capital gains exemption in India with a 1 year lock up. Conceptually I am not against the philosophical anchor that you use about capital gains exemption for stock markets not having any economic justification, but practically in an Indian context I can vouch that it helps attract investments which will otherwise be scared away. Having invested in most global markets (with big global investment firms) directly and having been part of decision making, I can say that the one entity which anybody globally dreads is Indian bureaucracy. The number of forms and signatures and certificates one needs if one has to touch the Indian tax authorities every year is mind boggling. The 1 year long term definition makes life very simple for a lot of long term investors who are comfortable investing in India and holding on with the comfort that they do not have to submit reams and reams of paper to justify cost price, source of funds, remittance proof, before their funds are released after tax clearance of every transaction (which was the case before the 2004 change).